If you live in the U.S. or read the news, you are probably aware that almost 25% of the country is in a moderate to severe drought. Water districts throughout the southwest U.S. region have put water restrictions in place and are cracking down on businesses and residents who exceed limits. The onerous fines and increased rates have made many consider other ways to reduce their usage. These people and the more environmentally conscience have been removing turf and replacing it with less water thirsty plants or artificial lawns. To give the customers an incentive, a large number of water districts have offered rebates of as much as $3.75 per square foot to remove sod.
At this point you may be asking what this has to do with taxes. Here’s the glitch. The IRS immediately got wind of this incentive program and saw an opportunity to bring in a little extra revenue by taxing the rebates.
Although states, like California, provide a tax exemption for turf removal rebates, the IRS tax code only offers an exemption for rebates on energy efficiency expenditures—water conservation rebates have not been addressed in the code. To play it safe, California water districts are now requiring tax identification numbers and other information from residential turf removal program participants who have received rebates in excess of $600. Those customers may receive 1099s this year and be required to report the rebate as income!
Commercial customers have already been receiving 1099s from the water districts in anticipation of the IRS decision which is still on the table. To date, the Los Angeles Metropolitan Water District has already issued more than 24,000 rebates of $600 or more. While a few residents have received rebates of $70,000 or more the average residential rebate is about $3,000. Obviously the IRS is drooling to get their hands on some of this rebate money.
If you are one of the people who have already received a rebate know there is a possibility you will have to report it on your taxes. If you are considering taking advantage of the rebate program you will want to factor in the possibility that the rebate may be taxable income and how that will affect your tax liability—especially if the rebate is significant.
Your choice—shorten those showers, let the lawn die, or hand over more money to the IRS. What is that old saying? No good deed goes unpunished!